Flight to quality: long-term investors eyeing Berlin?

An interesting article about the not so sexy, not so leveraged, not so spectacular Berlin real estate market. There was no bubble, there is value for money, and in these uncertain times Germany is perceived as being the uber-safe location in Europe. The prudent authors of AflatinBerlin agree with this view! ;D

BERLIN, Oct 9 (Reuters) – Sovereign wealth funds (SWFs) from Asia and oil-rich nations may be set to jump in to the German real estate market, helping to support a sector which has been knocked down but not out by the financial crisis.

Sales of commercial property surged to record levels in Europe’s biggest economy last year, but they slumped in the first half of this year as bank losses, the credit crunch and fears about the economic outlook dampened investor appetite.

Banks and other institutional investors have scrambled to hoard cash as money markets froze, which should open the door for cash-rich funds from China, Singapore and oil producers in the Gulf region, said DZ Bank analyst Christine Schaefer.

“You have these big state funds considering acquisitions,” she said. “And the Russians may be looking to make strategic investments here too. Germany is a stable option.”

Peter Starke, head of the investment division at real estate firm Aengevelt, said the publicity-shy funds were probably already buying in Germany via specially created holdings.

“I can think of two players from the Arabian region whom I strongly suspect are backed by wealth funds,” he said. “But the thing is, they don’t exactly walk around with signs around their necks saying ‘sovereign wealth fund ABC from country XY’.”

If SWFs invest enough to support or even boost property prices, it should help stabilise investment and domestic consumption, said MM Warburg economist Carsten Klude.

In contrast to countries like Spain, Britain and Ireland, Germany did not experience a major housing boom in past years. As a result, its residential market has held steady in 2008, helping offset a big drop in commercial property transactions.

In the first half of 2008, revenue from sales of office, retail and other business premises were down by 75 percent in Berlin, the biggest single market, official data show.

Investment in offices in Cologne fell 82 percent over the same period, and by 68 percent in Munich. In Duesseldorf, spending on all types of real estate was down by half.

The drop in activity reflects the disappearance of highly leveraged foreign financial investors, who bought up big German portfolios before the credit crunch hit.

Even if liquidity returns to credit markets soon, some observers say investment will be tailored to long-term returns of the kind favoured by SWFs and German open-ended funds.

For now, though, investors remain cautious and prices may need to fall further before SWFs part with big sums of money.

“A lot of people also think we’re heading for a recession, though we’re not actually there yet,” said Tobias Just, a property expert at Deutsche Bank in Frankfurt. “These new investors will need more certainty about this before they move.”

A government source told Reuters on Wednesday that Berlin would soon cut its 2009 growth forecast for Germany to below 0.5 percent from a current estimate of 1.2 percent.

“Basically nothing else will be sold this year,” he said of the capital. “What we’re hearing is that banks have closed their books for the year. It’ll probably last till February at least.”

INDIRECT STAKES

Germany’s housing market, where the majority of homes are rented, is also seen as a safe, if unspectacular bet.

House prices fell in Britain by over 12 percent in August year-on-year, and in Spain by nearly 5 percent, industry figures show. German house prices, by contrast, were broadly flat this summer, according to data from financial services firm Hypoport.

JLL’s Lemli said the SWFs which enter Germany are likely to buy stakes in property management firms rather than invest directly — a strategy that is already underway in Europe.

On Tuesday, the Singapore government’s wealth fund said it had raised its stake in U.K. real estate company British Land Co Plc to more than six percent.

SWFs could invest as much as $725 billion in global commercial real estate by end-2015, CBRE forecast last month.

One source of bargains may be asset sales by cash-strapped firms as the credit squeeze reaches the corporate sector.

“I think there will be more deals where owner-occupier retailers are pushing the margins and keen to sell their real estate,” said Iryna Pylypchuk, an analyst at property consultancy CB Richard Ellis (CBRE).

“And I think there is going to be more pressure from the banks. So I think market activity will pick up later this year.”